"I want to sell my business in the next 1-2 years..."

Many baby boomer business owners are thinking they "are ready" to leave their business in next 1-2 years and begin their retirement or third act in life.  With the economy growing and the number of investors seeking quality businesses to buy, many are thinking it could be an opportunity to "sell high" and accomplish their financial goals.

If indeed there is a desire is to sell within 2 years, and minimal or no exit planning and pre-sale due diligence has been achieved to this point, following are a number of the key planning issues that should be addressed in the first 60 days:

• Establish owner-based exit goals (desired buyer, sale-price, values-based goals, etc.) and do whatever possible to prepare for life after the sale. Survey data indicates most business owners are not happy in life two years after the sale of their business.

• Select a transaction intermediary (Investment Banker or Business Broker).

• Get an estimate of business marketability and value.

• Begin tax planning and pre-sale due diligence.

• Assess and, if possible, enhance business value drivers.

• Take steps to protect the value of the business during transfer (i.e., employee incentive plans/stay bonus).

• Select the remaining needed members of your Deal Team (i.e., CPA, M&A Attorney).

• Review your estate plan and business continuity arrangements.

• Make decisions pertaining to a plan for communicating your plans to employees.

This is not an exhaustive list and only represents what should happen in the first 60 days.  There is much more to do throughout the 2-year period to give yourself the best chance at a successful exit.  So, an immediate priority should be the selection of a trained and experienced Exit Planner to assist with the management of the exit planning project.  Typically someone is going to engage a knowledgeable project manager or general contractor to manage the process for building their "dream house".  In selling a business, there is much more at stake than building a dream house.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Are You an Active or Passive Investor....In Your Company?

I am a Passive Investor in the stock market – I use the “park it and forget it” approach.  Active investing seeks to outperform the market and requires paying constant attention to the market,  in order to buy and sell specific securities at just the right time to maximize your gain.

Every business owner benefits from the income they receive from their business, however, the business is not viewed as an asset.  Yet, for most business owners,  the most significant asset in their portfolio is their business and often plays an important role in the owner’s ability to retire.  The ability to sell the business for a good price is critical.  Unfortunately, many owners adopt the passive approach to increasing the value of that asset, and are left disappointed when the time comes to “cash in”. 

Here’s what can happen….. You start a business and learn to deliver excellent products or services to your clients at a good profit.  As your business grows, you do more of the same and your income increases.  You have succeeded!  Before long, you are at the hub of a bustling, successful business and enjoying the fruits of your labor.

However, you may have built income at the expense of building the asset.  When the time comes to sell/transfer that business, it may have minimal value – because you’ve been a passive investor – you’ve worked in the business, but not on it.  So, you may rightly ask, “What does an active investor look like?”. 

First, let’s talk about mindset – an active investor sets a goal /target for a future transaction and proactively works to hit those targets.  Likewise, active business owners must envision a desired future and act to hit that target.  It is an on-going process of assessing where you are, setting new goals and  taking steps to hit those goals.

Next, we need to understand value and what drives it  - then invest.  Here are some simple questions/steps to make the change:

1.     Assess your current value - what is your business worth?  Is it sellable?  How would the market view your business?  Get a professional 3rd party opinion.

2.     Assess your role - Is the business dependent on you?  Do you run the say-to-day operations or do you have a team that can run the business without you?  Start building a team one step at a time, and plan to delegate.

3.     Improve cash flow - Is your business profitable?  Do you invest back into the business? Do you seek to improve your cash flow?   Assess your current performance and identify areas for growth.

4.     Plan for growth - Do you have a plan for growth?  How could you expand your business? Understand your market.  Set a 5 year goal that is possible and make a plan to get there.

5.     Diligently Manage your business – do you have access to all the information needed to run your business?  Do you routinely (monthly at a minimum) assess budget vs actual performance, and make adjustments?

Rinse and repeat – It is rare to win the “Business Lotto” where you succeed overnight.  Growing busines value is a slow and steady process that requires purposeful, routine repetition of the above steps.  Each situation is different and your time is limited, but the simple steps over time will yield benefits.  An annual “state of the company” assessment, quarterly goal setting/revision, and monthly management reviews will develop a manageable “more active” approach.

The fact is many businesses are not sellable – but those that take the “active approach” will walk toward the exit with “eyes wide open” and maximize the probability of a successful sale. 

Invest 15 minutes and take our exit readiness questionnaire. We do not ask for confidential information and you will receive a 12-page report scoring you in four key planning areas.

Trust the Process of System Documentation

In business, one key aspect often separates successful ventures from those that struggle to thrive: systems documentation. It's the roadmap, the blueprint outlining how a business operates, from its day-to-day processes to long-term strategies. In a recent ExitReadiness® PODCAST episode with guest Jason Henderberg, we discussed how meticulous system documentation can significantly enhance a business's value, ultimately paving the way for a higher sales multiple.

With over 30 years of experience, Jason has witnessed firsthand the transformative power of systematizing business operations. His advice? "Trust the process."

During our conversation, he emphasized the importance of documenting systems comprehensively and likened it to crafting a playbook encapsulating every facet of your business, from customer interactions to backend processes. This documentation serves as a tangible asset, offering prospective buyers a transparent view of how the company functions efficiently and profitably.

But why does this matter? It's all about perception and value. Businesses with well-documented systems exude reliability and scalability, qualities that are immensely appealing to potential investors or buyers. When every operation is meticulously outlined, it instills confidence in a prospective buyer and mitigates risk, two factors that can significantly impact the valuation of a business.

Moreover, Jason highlighted the operational efficiencies that stem from system documentation. By streamlining processes and clearly defining roles and responsibilities, businesses can operate more smoothly, increasing productivity and profitability. This, in turn, enhances the industry's attractiveness to potential buyers who seek revenue streams and sustainable and scalable operations. He also pointed out that system documentation is not a one-time task but an ongoing endeavor. As businesses evolve, so too must their systems. Regular updates and refinements ensure that the playbook remains relevant and reflective of the current state of the company. It's a continuous improvement journey that pays dividends in the long run.

But how does one go about documenting systems effectively? It starts with a systematic approach. Strategically identify critical processes within your business and break them down into manageable steps. Document each step meticulously, leaving no room for ambiguity. Visual aids such as screen recordings or diagrams enhance clarity and comprehension. He also emphasized the importance of involving key stakeholders in the documentation process. Who better to provide insights into day-to-day operations than the individuals directly involved? By soliciting employee input at all levels, businesses can ensure that their systems documentation accurately reflects reality while fostering a sense of ownership and employee engagement.

In essence, Jason advises to "Trust the process of system documentation." It's not just a mundane task; it's an investment in the future value of your business. The sooner you start developing a company-wide culture of following best practices, the sooner you will have a safety net in case you need to sell your business during an emergency. So, roll up your sleeves and get to work following his proven methods. The value of your business depends on it.

Do I Need an Investment Banker or a Business Broker?

Suppose you have decided through planning and analysis that the ideal exit route for you is a sale to a third-party buyer. In that case, a skilled and experienced transaction intermediary will play a key role on your advisor team. Typically clients will have questions regarding the differences between business brokers and investment bankers and which would be best for their situation. Following are some key differences:

Role and Function:

• Investment Banker:

  • Investment bankers typically work for financial institutions and advisory firms. They provide clients with comprehensive financial and strategic advisory services, including mergers and acquisitions (M&A) advice.

  • They focus on more complex transactions, often involving larger companies and higher deal values.

  • Investment bankers help clients raise capital through various means, such as initial public offerings (IPOs), private placements, and debt offerings.

  • They provide strategic advice, financial analysis, valuation, negotiation, and deal structuring services to optimize the transaction's outcome.

• Business Broker:

  • Business brokers are intermediaries who assist in selling small to mid-sized businesses, usually privately owned or family-owned.

  • They primarily focus on facilitating the sale of existing businesses, often in the form of asset sales or stock sales.

  • Business brokers typically deal with businesses with lower market capitalizations and deal sizes.

  • They connect buyers and sellers, assist with business valuations, marketing, and negotiations, and help manage the transaction process.

Clientele:

• Investment Banker:

  • Investment bankers work with giant corporations, institutional investors, and high-net-worth individuals.

  • They are retained by companies seeking to engage in complex M&A deals, capital-raising activities, or strategic financial advice.

• Business Broker:

  • Business brokers work with small and mid-sized business owners who want to sell their businesses.

  • They also work with individuals or investors looking to purchase existing businesses.

Expertise and Services:

• Investment Banker:

  • Investment bankers have deep financial expertise and provide various services, including financial modeling, due diligence, legal and regulatory compliance, and market research.

  • They often have industry-specific knowledge and relationships with potential buyers or investors.

• Business Broker:

  • Business brokers focus on marketing and selling businesses and typically have a strong understanding of the local market.

  • They assist with business valuation, preparing businesses for sale, and handling negotiations. Still, their services may not be as comprehensive as investment bankers.

Compensation:

• Investment Banker:

  • Investment bankers typically charge fees based on a percentage of the transaction value (e.g., success fees). They may also receive retainer fees for their advisory services.

• Business Broker:

  • Business brokers often earn commissions based on the sale price of the business. The commission percentage can vary depending on the size and complexity of the transaction.

In summary, investment bankers and business brokers serve different market segments and offer distinct services. Investment bankers focus more on complex financial transactions for larger companies. At the same time, business brokers specialize in helping small and mid-sized businesses change ownership. The choice between the two depends on the specific needs and goals of the parties involved in the transaction.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Do I Need To Do Now If I Want To Exit My Business In 3 Years?

If you plan to exit your business in three years and you’ve yet to begin preparing, the following are some suggested steps you can take to prepare for a successful transition:

• Assess Business Exit Readiness: Conduct a comprehensive assessment of your business to understand its current strengths, weaknesses, and areas for improvement. Review financial statements, operational processes, customer base, market position, and competitive landscape. Identify any areas that need attention or strategic adjustments to enhance the value and marketability of your business.

• Review your Personal Financial Plan: Create a plan that aligns with your exit timeline while considering your personal financial goals, desired sale price, and potential tax implications. Work with a financial advisor to determine the financial targets you must achieve before exiting the business and develop a strategy to maximize your business's value within the given timeframe.

• Strengthen Management and Key Employees: Identify and develop a strong management team capable of running the business in your absence. Invest in training and mentoring key employees to ensure they possess the necessary skills and knowledge to assume leadership roles.  

• Streamline Operations and Systems: Streamline operational processes and systems to increase efficiency, reduce costs, and improve overall performance. Identify areas where automation or technology upgrades can enhance productivity. Implement standard operating procedures and documentation to ensure continuity and ease the transition for a new owner or management team.

• Diversify and Expand Customer Base: Reduce dependency on a small number of key customers and diversify your customer base. Develop strategies to attract new customers and strengthen existing relationships. Focus on customer retention and satisfaction to enhance the perceived value of your business to potential buyers.

• Protect Intellectual Property and Assets: Review and protect your intellectual property rights, including trademarks, copyrights, patents, and trade secrets. Ensure that contracts and agreements with employees, suppliers, and business partners include appropriate confidentiality and non-compete clauses. Safeguard physical assets like property, equipment, and inventory to maintain value and appeal to buyers.

• Seek Expert Advice: Seek advice from professionals experienced in business exits and transactions, such as exit planners, attorneys, accountants, and investment bankers. They can guide you through the process and provide valuable insights to maximize the value of your business.

• Document and Organize Business Information: Organize and document critical business information, including financial records, contracts, licenses, permits, legal documents, and operational procedures. Ensure that all records are up-to-date, accurate, and easily accessible. This will facilitate the due diligence process and instill confidence in potential buyers.

• Prepare an Exit Strategy: Work with your advisors to develop a comprehensive exit strategy tailored to your goals and circumstances. Determine the most appropriate exit option for you, whether selling to a third party, passing the business to a family member or key employee, or pursuing a merger or acquisition. Outline the steps and timeline for executing your chosen exit strategy.

Remember, planning for a business exit takes time and careful consideration. By starting early and taking proactive steps, you increase your chances of achieving a successful transition and maximizing the value of your business. Regularly revisit and update your plan as you approach the exit date to ensure it remains aligned with your goals and the market conditions.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What is a Certified Business Valuation and When Do I Need One?

A Certified Business Valuation is a comprehensive assessment conducted by a qualified professional to determine the fair market value of a business. It involves a systematic analysis of various factors such as financial statements, industry trends, market conditions, company assets, intellectual property, customer base, and other relevant aspects to estimate the worth of a business.

You may need a Certified Business Valuation in several situations, including:

• Selling or Buying a Business: When you're involved in a business sale or acquisition, a valuation helps determine a fair asking price or offer, ensuring both parties understand the business's value.

• Obtaining Financing: When seeking a loan or financing for your business, lenders often require a valuation to assess the value of the company and its ability to generate cash flow to repay the loan.

• Partnership Dissolution: If you're part of a dissolving business partnership, a valuation is essential to determine the fair value of each partner's share and facilitate a smooth division of assets.

• Estate Planning: Business valuations are necessary when planning for estate taxes or distributing business assets as part of an inheritance. A valuation helps establish the value of the business for tax purposes and ensures a fair distribution among beneficiaries.

• Shareholder Disputes: In case of disagreements among shareholders, a valuation can be conducted to determine the value of shares or ownership interests, aiding in resolving disputes or facilitating a buyout.

• Financial Reporting: Valuations may be required for financial reporting purposes, such as complying with accounting standards or fulfilling regulatory requirements.

• Litigation or Dispute Resolution: During legal proceedings like divorce settlements, bankruptcy, or insurance claims, a certified valuation can provide an objective assessment of the business's value, serving as evidence in court.

It's important to note that the specific circumstances and requirements for a Certified Business Valuation may vary based on jurisdiction and the purpose for which it is being conducted. Consulting with a qualified business valuator or professional accountant can help you determine when and how to obtain a valuation tailored to your needs.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Should I Know About a Letter of Intent (LOI) When Selling My Business?

A Letter of Intent (LOI) is a document used when selling a business to outline the preliminary terms and conditions of the proposed transaction. While the specific content of an LOI can vary, here are some key points to consider:

• Purpose: The LOI serves as a non-binding agreement between the buyer and seller, expressing their intention to proceed with negotiations and due diligence toward a potential sale. It sets the stage for further discussions and acts as a starting point for the formal agreement.

• Non-Binding Nature: Typically, an LOI is non-binding, meaning it does not legally obligate either party to proceed with the sale. It serves as a negotiation roadmap and establishes the basic terms and conditions to guide the transaction.

• Key Elements: An LOI generally includes essential information such as the purchase price or valuation methodology, proposed deal structure (e.g., stock purchase or asset purchase), payment terms, conditions precedent (e.g., due diligence and satisfactory financing), exclusivity period, and confidentiality provisions.

• Confidentiality: It is common for an LOI to include a confidentiality clause to protect sensitive business information disclosed during the negotiation process. This ensures that both parties maintain confidentiality and do not disclose or misuse proprietary or confidential information.

• Due Diligence: The LOI may outline the timeframe and scope of the due diligence process, allowing the buyer to conduct a thorough examination of the business's financial, operational, and legal aspects. It may specify the buyer's access to records, the need for independent audits or other investigations to validate the information provided by the seller.

• Exclusivity and Good Faith: The LOI may include a provision granting the buyer exclusivity for a specified period, during which the seller agrees not to negotiate with other potential buyers actively. Additionally, both parties typically agree to negotiate in good faith and proceed diligently with the transaction.

• Conditions and Termination: The LOI may specify certain conditions precedent that must be met for the transaction to proceed. These conditions may include regulatory approvals, third-party consents, or the successful completion of due diligence. The LOI should also clarify the circumstances under which either party can terminate the agreement.

• Legal Counsel: Both parties should seek legal counsel before signing an LOI. While an LOI is usually non-binding, it is still a significant document that can impact the negotiation process and subsequent sale agreement. Consulting with an attorney experienced in business transactions can help protect your interests.

Remember that an LOI is a preliminary document and should be followed by the negotiation and drafting of a formal Purchase Agreement, which will provide the binding terms and conditions for the sale.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Should I Expect in a Due Diligence Process When Selling My Business?

When selling a business, the buyer typically conducts a due diligence process to gather and evaluate relevant information about the business. Due diligence aims to assess the business's risks, opportunities, and value before finalizing the transaction. While the specific scope and depth of due diligence can vary, here are some common areas that may be examined:

• Financial Due Diligence: This involves thoroughly reviewing the business's financial statements, tax returns, and accounting records. It includes analyzing revenue and expense trends, assessing the quality of earnings, identifying any potential financial risks or liabilities, and verifying the accuracy of financial information.

• Legal: Legal due diligence aims to identify any legal issues or risks associated with the business. It involves reviewing contracts, leases, licenses, permits, litigation history, intellectual property rights, employee agreements, and other legal documents relevant to the business. The goal is to ensure the business complies with applicable laws and regulations and assess potential legal liabilities.

• Operational: This focuses on evaluating the operational aspects of the business. It may involve assessing the efficiency of business processes, analyzing supply chain management, reviewing inventory and production systems, evaluating customer contracts and relationships, and examining the overall operational infrastructure of the business.

• Human Resources: Human resources due diligence involves reviewing employee-related matters, such as employment contracts, organizational structure, key employee roles and responsibilities, compensation and benefits, labor agreements, and any potential legal issues related to employees. The buyer may also assess the culture and employee morale to ensure a smooth transition.

• Customer and Market: This entails analyzing the business's customer base, sales pipeline, market trends, competitive landscape, and marketing strategies. The buyer may seek to understand the business's market positioning, growth potential, customer satisfaction levels, and any risks associated with customer concentration or changing market dynamics.

• IT and Technology: With increasing reliance on technology, due diligence may involve evaluating the IT infrastructure, software systems, cybersecurity measures, data privacy compliance, and intellectual property related to technology. This assessment ensures that the business's IT assets are secure, reliable, and capable of supporting future growth.

• Environmental and Regulatory: Depending on the nature of the business, environmental and regulatory factors may be assessed to identify any compliance issues or potential liabilities. This may include reviewing permits, environmental impact assessments, hazardous material handling, and compliance with relevant regulations.

• Other Areas: Depending on the specific industry or nature of the business, additional areas of due diligence may be conducted. For example, a property appraisal or environmental assessment may be conducted if the business has significant real estate holdings. Intellectual property due diligence may be necessary for businesses heavily reliant on patents, trademarks, or copyrights.

The due diligence process can be time-consuming and may require the involvement of various professionals, such as accountants, lawyers, industry experts, and consultants. It's essential to be prepared and organized, providing the necessary documentation and access to the information requested by the buyer. Engaging experienced advisors can help you navigate the due diligence process effectively and ensure a smoother transaction.

Contact us at email@ennislp.com for a free Due Diligence Checklist.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

A Growth Plan Helps To Maximize Your Business Sale Price

Every sale of a business requires negotiation.  The buyer is purchasing the future potential of the company and is aware that they can only learn so much in a due diligence process.  The seller’s strong management team, documented procedures, and portfolio of recurring revenue clients, and other value drivers will move a buyer forward. And, if a seller wants to further strengthen their story at the negotiation table they will be prepared with a documented strategic plan for future growth.

What’s in a Growth Plan?

An effective growth plan is far more than numbers on a spreadsheet.  It addresses these key questions:

• What will our revenues be in the next three to five years?

• Who will our clients be, and what new markets will we pursue?

• What services will we continue to sell, discontinue?  What new services will we offer?

• What is the profitability of those products?

• What resources are required to accomplish our goals?

• Who will be responsible for each element of the plan?

The Effect of a Proven Growth Plan…

Demonstrating that the management team not only exists but can perform.

• The position of the company in the market is clearly understood.

• The projected cash flows are credible.

• Enables a higher starting point for negotiation.

This last benefit is perhaps most significant.  As we all know, the value of a company is a function of Cash Flow/EBITDA,  and this is the starting point for negotiation. 

Now consider two companies…

Both Company A and Company B have a $ 2M EBITDA and a multiplier of 5x.  The value = $10M.

Both companies say they plan to grow to $4M EBITDA in the next 5 years.  However, Company A has no track record, but Company B has demonstrated growth plans.  And they have defined this growth plan as thoroughly as they have in past years. 

While Company A has little basis to start over $10M ($2Mx5), Company B may have a credible basis to start negotiations at $20M valuation ($4Mx5). In a competitive market, developing and executing on growth planning will position your company to maximize its value at sale.   

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Role Will You Be Willing To Play Post-Sale?

A key element for an exiting successfully on your own terms and conditions is realizing the role(s) that you’re willing to play post-sale or transfer.

John sold to a strategic buyer and an earn-out with John working as an employee for 3 years as part of the deal. He had not planned in a way to avoid this, and after 2 years decided to forfeit the balance of his payout and leave because he was finding it too difficult to work for the new management.

Due to the small size of her business, Susan’s only option for a third-party sale was someone interested in “buying a job”. Susan did the deal and was forced to self-finance the deal and be a lender. After three years into the deal, the new owner was no longer able to make loan payments due to the weak performance of the business.

Bob planned for and was able to sell a majority stake in his business (that had very strong revenue, cash flow, and growth potential) to a financial buyer. In creating and implementing his comprehensive exit plan, Bob had decided he would be willing to be a partner in order to have a chance at “a second bite of the apple” years later.

In completing her sale to a key employee group, Sarah was willing to continue involvement as a consultant and her agreement is for 3 years.

It’s important to understand these roles and decide which of them you’d be willing to assume when selling or transferring your business. Each role is common to transactions of small businesses and at times unavoidable. However, with the right long-term planning, you might be able to avoid a role or roles you’d rather not play. For example, if you have built a business with significant revenue, a proven next-level management team, and a credible plan for future growth, you may avoid an earn-out. So, understand what roles you would be willing to play, and get started today planning for your exit because the more time you have the greater chance you will be in control when you leave.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “sellable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

  • Transaction and professional fees.

  • An asset sale was negotiated and there was income tax on some asset depreciation recapture.

  • $1 million in business debt needed to be repaid.

  • Capital gains and affordable care act taxes.

  • Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a sellable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

If you need help contact us at 301-859-0860 or email@ennislp.com. Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Deal Momentum, Deal Fatigue, and Pre-Sale Diligence

With the help of her Exit Planning Advisor, Betty has decided that a sale to a third-party buyer would best accomplish all of her goals (financial; values-based; legacy).

The process of quantifying her business and personal resources, with a financial gap analysis, has been helpful to Betty in determining her departure date in six years. She now knows the current fair market value of her business, and how much it will need to increase in value for the attainment of her financial objectives at sale in six years.

Betty now also understands (again with the help of her Exit Planning Advisor) the importance of maintaining “deal momentum” when she eventually enters into a sale transaction.

Betty now knows that all too often “deal fatigue” sets in and damages or destroys deal momentum experienced early in the process. She also understands that deal fatigue is typically the result of a difficult and lengthy due diligence process. Due diligence is defined as the process by which the buyer requests documents, data, and other information pertaining to the business they want to review to identify any potential liabilities or hindrances to a deal getting done. The process of due diligence involves setting up a digital “Data Room” where all requested information is deposited for review.

A key component of Betty’s comprehensive plan for exit is to do everything possible to ensure deal momentum and avoid deal fatigue when the time comes.

Betty also wants to be prepared if a serious and qualified buyer comes calling earlier than her six-year time frame. So, with the assistance of her Exit Planning Advisor, she is going to conduct “Pre-Sale Diligence” systematically over the next 12 months, including the set-up of a virtual data room which she will regularly review and update as needed. This preemptive approach will significantly increase her chances of deal momentum and a smooth transaction experience.

At that point in the future, when Betty’s either approached by a potential buyer or when she takes her business to market, having conducted Pre-Sale Diligence, she will be better prepared, more confident, and less stressed and anxious — all of which lend toward sustaining deal momentum and a successful transaction.

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Contact us if you would like assistance with Pre-Sale Diligence | email@ennislp.com | 301-943-8203

Complete our FREE ExitMap® Assessment and get a 12-page report scoring you in four key planning areas: Finance, Planning, Profit/Revenue, and Operations. It will take about 15 minutes and we do not ask for confidential information.

What's an "Earnout"?

The term “earnout” is often mentioned by an advisor or business owner when describing the terms of a business sale. If an owner has as part of their deal an earn-out, they have been asked by the buyer of their business to stay on for a specified period of time in a senior leadership role within your acquirer’s company. In this role, they will be charged with achieving a set of goals in the future (i.e., revenue or profitability goals) in return for additional compensation for their business. This approach is used when the successful operation of the business being bought is dependent on its owner, and/or the buyer needs to bridge the gap between what they are willing to pay for the business and the amount of money the owner wants for the business.

Earnout terms average somewhere between two and three years in length and are very common in service businesses. The assigned earn-out goals are often linked to revenue and profit, the retention of specific accounts or customers, or any other metric that the buyer considers important and the seller is willing to agree to.

Earnouts at times can work extremely well for both parties. At the same time, all too often it doesn’t work out with the selling owner leaving prior to receiving their earnout. A common reason for an owner leaving early would be the fact that they are now an employee of the company they have invested years in building, and that can be a very difficult adjustment.

We talk a lot about planning to exit “on your own terms and conditions”. Leaving on your own terms and conditions might look like not being forced into an earnout when you sell. If you begin planning your exit well in advance, you can think through what roles you would be willing to play when you leave (i.e, lender, employee, shareholder), and which roles you wouldn’t be willing to play. For example, if there is just no way in the world you’d ever want to be an employee of the business you’ve built from the ground up, at the time of sale you will need a business which does not depend on you — and building a business like that can require a lot of time.

Take our FREE ExitMap® Assessment and get a 12-page report scoring you in four key planning areas: Finance, Planning, Profit/Revenue, Operations. It will take about 15 minutes and we do not ask for confidential information.

ennislp.com | email@ennislp.com | 301-859-0860

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “sellable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

  • Transaction and professional fees.

  • An asset sale was negotiated and there was income tax on some asset depreciation recapture.

  • $1 million in business debt needed to be repaid.

  • Capital gains and affordable care act taxes.

  • Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a sellable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

If you need help contact us at 301-859-0860 or email@ennislp.com. Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Cash Flow Projection and a Successful Exit

A small business owner named Simon understands how the cash flow of the business drives his current income, and as well how it would eventually impact the valuation and sale price. However, Simon lacked awareness of elements of potential exit routes that demand cash flow. For example:

• When considering an ESOP, his business met all the basic parameters EXCEPT having the adequate cash flow to service the debt needed to fund the ESOP.

• When running a “sanity check” as to whether key employees could finance an insider purchase with a bank loan, the bank would only finance a small amount…due to projected cash flow.

• In considering a third-party sale, and as a result of Simon’s exit planner’s financial gap analysis, there was a need to invest in updated systems, new hires (next-level management), and incentive plans for key employees in order to increase the value of the business…cash flow was needed to make it happen.

Simon has said that “he’s ready to exit”, but after analyzing his business’ readiness for an exit, and projecting future cash flow, Simon will not be able to exit the way he wants to for at least five years — there’s just too much to get done to realize the value he needs. So, the moral of the story is to have a ten-year cash flow projection and keep it current for planning both growth and your eventual exit. The stronger the cash flow and its management, the greater chance of building a transferable business and having multiple options for exit.

And, begin planning today…it will take longer than you think.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

How Will Selling (Or Not Selling) Your Business Impact Your Lifestyle In The Future?

Our fictional business owner, Baby Boomer Jane Doe, is like most owners in that her business is her largest asset and will play a central role in achieving future financial security, goals, and dreams.  Jane has been in business approximately 25 years and, as a result of the steady stream of business revenue, she has experienced a very comfortable lifestyle that includes two homes, private education for the children, annual vacations, and plenty of discretionary income.  

But now Jane wants to plan for "what's next" as she now has grandchildren in different states she wants to visit regularly and has lost the passion once enjoyed in owning and running the business.  In conversation, Jane says with a level of exasperation, "I'm just ready to leave the business...I'm done".  Jane doesn't have management or children interested in purchasing the business, no longer wants to be an owner and thinks the best exit route would be a third-party sale.  

After engaging an exit planner to lead the design and implementation of her plan to leave, Jane is alarmed and disappointed to learn that her business is worth quite a bit less than what she had estimated and that a significant increase in her investable assets will be required to do all she wants to do post-exit.  Her financial planner assessed that her "plan for life after the business" would have a price tag of at least $4 million, while her business is really worth $1 million (Note: Jane had estimated a $2 million value), she has current investable assets of $1 million, representing an "asset gap" of $2 million.  And again, Jane wants to leave now!

As Jane's exit planner continued to "expose reality" regarding her business readiness for a successful third-party sale, Jane also had to come to grips with the reality of her business not being as sellable as she had assumed.  The planner pointed to a number of "value drivers" that needed strengthening (i.e., EBITDA, capable management team, plan for growth, etc.) to make her business more attractive to either a strategic or financial buyer. 

So, if Jane chooses to sell now and is able to, all indications are that she would not receive a sufficient amount of net proceeds to facilitate her post-exit life plan.  She will either need to begin now to execute a plan to accelerate the value of her business and sell at a later date or significantly reduce her post-exit goals and lifestyle...neither of which are attractive options.  Jane is not feeling at all good about her limitations and lack of control over her current options.  

It is now clear to Jane that it would have been wise years ago to assess both her personal and business readiness and put a plan in place to accelerate the value of the business.  If the business was more sellable and highly valued she would have more options for when and how she exits.

Have you conducted an accurate financial gap analysis including an objective estimate of business value and personal financial plan?  Do you have a plan in place to systematically maximize the value of your largest asset?  Will selling (or not selling) your business affect your future lifestyle goals?  Will it be sellable as more and more baby boomer business owners put their business on the market in the next decade?

Take control of your plan now so that you exit on your own terms and conditions.  Contact us for assistance with any of these critical planning issues.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Do I Really Need a Transaction Intermediary???

Should I engage a business broker or M&A professional to sell my business, or should I go at it alone?

Our firm is agnostic as to how a business owner exits their business.  The mission is designing and implementing a plan for the exit route (sale to a third party, sale to insiders, transfer to children, ESOP, absentee owner) that will give the owner the best opportunity to attain all their goals (financial, values-based, legacy).  That’s a key value-add when engaging our firm.

Often the best exit strategy is a sale to a third-party buyer.  That’s when we suggest to our client engaging a transaction intermediary (Business Broker, M&A Professional, Investment Banker), and that’s when they ask the obvious question, “OK, why do I need a transaction intermediary?

In his book, “The Art of Selling Your Business”, John Warrillow provides helpful advice to a business owner who is pondering the question“Should I just go at it alone?”.  In Chapter 13, Bidding War, Warrillow shares the following reasons for engaging a transaction intermediary to market and sell your business:

·      Create competition:  A good intermediary will create competition for your business and ensure that you’re getting a fair price and terms.

·      Keep acquirers interested:  Typically, it is a challenge to keep potential acquirers interested during a broad auction. 

·      Provide a buffer:  A skilled intermediary will act as a buffer between you and the buyer(s) as the deal progresses and your business is scrutinized by the buyer.

·      Be the bad cop:  They can be your “bad cop” pushing back on deal points, allowing you to maintain a positive relationship with the buyer.

·      Time the reveal:  A skilled and experienced intermediary will know how to package and reveal information to keep the maximum number of buyers interested.

·      Receive services (mostly) for free:  Even though they are expensive, you’re probably better off financially (on a net basis) using a good intermediary.

We highly recommend Warrillow’s book to any owner thinking that a third-party sale is their best route for exit. Our experience has proved his propositions above to be accurate.  This is yet another key area in exit planning where a business owner will greatly benefit if conscious of the oft-quoted phrase “I don’t know what I don’t know” and proceed to wisely engage an expert.  That owner will significantly increase their chances of avoiding a bad exit and having no regrets.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Key Employees and Building and Protecting Business Value

You may have people working in key roles who are instrumental in growing and building the value of your business. These key people can be identified as having the following characteristics:

• makes a substantial business contribution

• possesses critical information or knowledge or

• maintains and nourishes key contacts and relationships

In helping clients plan to build a business that’s sellable, and then eventually exit on their own terms and conditions, we emphasize that “key people are a key value driver “ in realizing success in both of those strategic goals. And, we find it helpful for owners to have two categories in mind when considering key employees:

1. Building business value

2. Protecting business value

Key people help owners build value and exit successfully as their roles serve in removing the owner(s) from the day-to-day management of the business, and by accomplishing objectives and key results for growing the business, that are aligned with the exit goals of the owner(s). An important planning focus for the owner(s) in building value, as it pertains to key employees, would include alignment of the employee’s performance goals with the exit goals of the owner(s), and a well-defined key employee incentive plan that provides impactful awards for goal attainment and retention.

Owners need to be aware, that there is also inherent risk related to key employees. Risks involving departure and competition, solicitation of customers and/or employees, and disclosure of confidential information. There is also the risk of losing a key employee due to unexpected death or disability. It can be costly to recruit, train, and compensate for a replacement in such a situation, as well as makeup for any loss in corporate earnings. Important planning areas in protecting business value, as it pertains to key employees, would include: Well-written and regularly reviewed employee documents (i.e., Employment Agreement; (listen to ExitReadiness® PODCAST Episode 43 w/attorney Marc Engel) and adequate life insurance coverage on the key employee (listen to ExitReadiness® PODCAST 54 w/Bill Betz of Betz Financial Advisory).

Check out our virtual exit planning resources and solutions at exitreadiness.com